Define the term subsidies indicated in bold in the text (paragraph [2]).

Define the term variable costs indicated in bold in the text (paragraph [7]).

Using a supply and demand diagram with international trade values from the text, explain the statement that “The US imported 1200 million pounds (lb) of shrimp last year and produced 100 million pounds (lb) of shrimp domestically” (paragraph [2]) (Does not need to be to scale).

Using an average costs diagram, explain the short-run consequence for shrimp farmers if the price received “is not enough to cover their variable costs” (paragraph [7]).

Using information from the text/data and your knowledge of economics, discuss the view that the US should impose tariffs on the imported shrimp.

Level 
0 The work does not reach a standard described by the descriptors below. [0]

1 Vague definition. [1]
The idea that the government gives money to an industry.

2 Accurate definition. [2]
An explanation that the government gives money to an industry in order to, any one of the following:

• reduce cost of production
• increase output/supply of a good
• protect producers from foreign imports
• reduce the price of a product.

Level 
0 The work does not reach a standard described by the descriptors below. [0]

1 Vague definition. [1]
The idea that they are costs of production that change.

2 Accurate definition. [2]
An explanation that they are the costs of production that change as output changes (or increase as output increases).

Level 
0 The work does not reach a standard described by the descriptors below. [0]

1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled international trade diagram, showing a domestic supply of 100 million lb and an imported supply of 1200 million lb or explaining that at the world price, US shrimp farmers are only willing to supply 100 million lb and that the rest of the domestic demand is met by imports of 1200 million lb.

2 There is a correct diagram and an accurate written response. [3–4]
For drawing a correctly labelled international trade diagram, showing a domestic supply of 100 million lb and an imported supply of 1200 million lb and explaining that at the world price, US shrimp farmers are only willing to supply 100 million lb and that the rest of the domestic demand is met by imports of 1200 million lb.

The numbers do not have to be on the diagram. Full marks may be awarded if the numbers from the text are used in the explanation with correct references to the quantities indicated on the diagram (eg 0Q1 is domestic supply of 100 million lb and Q1-Q2 is the imported amount of 1200 million lb).

The use of P and Q on the axes is sufficient for a demand and supply diagram. The world supply curve must be labelled S_W or S_world (to distinguish it from the domestic supply curve). S or S_D are both fine for the domestic supply curve.

Level 
0 The work does not reach a standard described by the descriptors below. [0]

1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled costs diagram, showing AVC (MC not required for full marks) with a price below AVC or for explaining that since the shrimp farmers are not able to cover their average variable costs, some may have to shut down in the short run.

2 There is a correct diagram and an accurate written response. [3–4] 
For drawing a correctly labelled costs diagram, showing AVC (MC not required for full marks) with a price below AVC and for explaining that since the shrimp farmers are not able to cover their average variable costs, some may have to shut down in the short run.

An alternate approach would be to show the price at the minimum of AVC and explain that if the price were to go below this level, the firms would have to shut down as they would no longer be able to cover their variable costs.

For a costs diagram, the use of Price or Cost (P or C) on the vertical axis and Output or Quantity on the horizontal axis is sufficient.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Do not award beyond Level 2 if the answer does not contain reference to the information provided.

Level 
0 The work does not reach a standard described by the descriptors below. [0]

1 Few relevant concepts are recognized. [1–2]
There is basic knowledge/understanding.

2 Relevant concepts are recognized and developed in reasonable depth. [3–5]
There is clear knowledge/understanding.
There is some attempt at application/analysis.

3 Relevant concepts are recognized and developed in reasonable depth. [6–8]
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence.

Command term
Discuss requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.

Responses may include:

• definition and diagram illustrating the effect of a tariff
• reasons to support the view that tariffs should be imposed:
  - higher costs of oil as a result of the oil spill have led to higher costs of production for US shrimp farmers and so higher prices for US shrimp (diagram possible) (paragraph [2])
  - if they are unable to cover their variable costs, many may go out of business leading to structural unemployment (may refer to part (c)) (paragraph [7])
  - there may be significant damage to the standard of living of shrimp farmers and their communities (paragraph [9])
  - foreign shrimp producers may have been given subsidies that are illegal under WTO rules, enabling them to lower prices to the point where US producers cannot cover their costs (paragraph [6])
• reasons against the view that tariffs should be imposed:
  - there will not be tariffs on shrimp from Thailand and Indonesia which are the largest producers of imported shrimp, and so the tariffs on the producers in the other five countries may not have that much of an effect on the level of imports (paragraph [3])
  - the tariff will be damaging to the shrimp producers in the five countries that are affected, all of which are developing countries; the tariff could hinder their development (paragraph [6])
  - the ruling was made by the US Commerce Department (not the WTO) and so the conclusion are likely to be in favour of the US producers
  - there may be insufficient evidence to support the claims (paragraph [6]) and so tariffs will violate WTO rules
  - there may be retaliation from the countries affected, which could damage other US producers
  - the US producers are already getting financial support from BP (paragraph [8])
  - higher costs for food retailers and distributors
  - distortion of comparative advantage
  - misallocation of scarce resources
  - reduced consumer surplus.

Any reasonable discussion.

Almost all candidates were able to define this term.

This question was not well-answered by the majority. Most candidates were able to access at least one mark, for a vague response, but clarity was lacking.

This was well-answered by most candidates, suggesting that candidates are comfortable with the free trade diagram. Lower achieving responses showed a shift of the upward-sloping domestic supply curve.

A lot of information is given in this question, so that candidates familiar with this section of the theory of the firm were able to perform well. However, there were a lot of poor variants of the model. Many candidates seemed to remember parts of the theory, but were unable to apply it accurately. Common errors included not showing a price on the y-axis, mixing up fixed and variable costs, and labelling the AVC curve as the ATC curve.

“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.

This is a standard AO3 question, and most candidates were able to gain at least three marks by presenting the standard tariff diagram with basic analysis. In order to access higher marks, there had to be a reasonable contextualisation of the market for shrimp in the US. There was a lot of information in the text that could be used to make an argument. Typically, candidates would provide a list of advantages and disadvantages of protectionism. As always, to access level 3, candidates needed to provide some synthesis/evaluation, and this was not often present. Very good answers would develop some theory in addition to the standard tariff analysis. (e.g. structural unemployment, comparative advantage, higher costs of production for producers using shrimp, consumer surplus).